Earlier this year, our private equity team identified the technology sector to be an area gaining increasing momentum throughout 2019 for both Canadian and international investors. In August, we assisted McRock Capital in its $80 million initial closing of its second venture capital fund, dedicated solely to investing in the global trend around the Industrial Internet of Things (“IIOT”). Investors included not only large institutional Canadian entities such as BDC Capital, Export Development Canada and Alberta Enterprise Corporation, but also some significant international players, including Cisco Investments, Shell and Mitsubishi. The impact of technology on the private equity space is evident under three distinct categories: growing investments in technology; exits from certain traditional assets; and the necessity for private equity firms themselves to adopt internal technological practices in order to keep up with fast-changing industries and companies alike.
Technology as an Investment Theme
Perhaps the most obvious technological presence in private equity and investment funds is the significant amount of capital flocking toward technology specialists and disruptors. IIOT, for example, is a burgeoning space in which companies in consumer electronics, medicine and healthcare, industrial design, oil and gas, agriculture, manufacturing, logistics and other sectors affix sensors to equipment that then communicate data back to the machines’ owners; all with a view to improving efficiency. Such connected industrial devices are now pervasive, having increased no less than 250% since 2012, totalling about 31 billion worldwide in 2018. In addition to IIOT, the technology sector more broadly accounted for 54% of the total venture capital dollars invested in the first half of 2019 in Canada ($1.2 billion over 144 deals), investment levels only seen since the 2000 dot-com bubble.
This year, new funds have been established with the sole mandate of investing in the Canadian technology sector, including the likes of Framework Venture Partners in early 2019 ($150 million) and Georgian Partners in Q3 (the largest independent VC fund in Canadian history at US$550), both of which are targeted at early stage start-ups and later-stage technology companies.
Technology and Private Equity Exits
In addition to investors looking to the technology disruptors for new opportunities, investments that are more traditional have also been impacted, prompting exits from assets that are becoming less valuable as a result of new technologies. In late September, news broke that CPPIB was exploring a sale of its 39 percent stake in European car park manager Interparking, citing the fact that these kinds of parking assets are becoming increasingly less profitable given the onset of various ride-sharing technologies and the resulting reduction of car ownership. In late October, Dutch pension fund APG announced that it would acquire the 39 percent stake in the coming months. In general, larger and less nimble organizations and sectors are more vulnerable to these rapid changes, which could explain part of the calculus behind increasing investments in tech-oriented disruptors.
Tips for Investors and Advisors
We know that technological disruption is far-reaching, impacting almost every sector of the economy. Because investors are focused on creating value over a three-to-seven year timeline, the fast-pace of technological disruption also means that private equity firms and advisors must adapt internally and leverage technology-based tools in conducting their own diligence, short-term initiative focus and exit strategy. Investors and advisors must also ensure a comprehensive understanding of the impact of technology on a given business model in order to predict and react to unexpected change. Investors would also be wise to maintain a focus on emerging market economies and their respective technology-oriented businesses, where legacy inertia apparent in some developed market businesses does not exist; harnessing recent technological developments allows businesses in emerging markets to leap-frog on the back of existing global innovations while maintaining the flexibility to adapt to disruption.
Technology in private equity and investment funds represents a global challenge but also an opportunity for private equity in 2020. Gowling WLG's expert private equity team has broad fund formation and investment expertise; we deliver bespoke advice at every phase of the private equity life cycle. For more information on how we can help, contact Edward Johnston, National Leader, Investment Funds and Private Equity at email@example.com.